Chile and Its Trade Transaction Costs
January 6, 2003
Chileans are jubilant over the new U.S.-Chile bilateral free trade agreement. Some are even predicting that it will allow their nation to become the next Ireland, in terms of enhanced trade.
As good as this sounds, trade specialists say Chile will have to take some steps to maximize it's marketing opportunities.
In the first place, it is handicapped by its distance from the U.S. -- which makes it one of our most remote trading partners.
- UCLA economist Ed Learner has calculated that -- depending upon the type of good -- a distance of 1,000 miles is equivalent to having to pay import tariffs between 7 percent and 17 percent.
- Chile can partially offset the disadvantages of distance from U.S. markets by reducing what are called its "transaction costs."
- This can be accomplished by adopting enlightened policies -- such as less regulation, a stronger private sector, leaner bureaucracies, less red tape, more transparent political systems, and greater protection of property rights.
- While Chile has a generally market-friendly environment, it has made no progress in market reforms in the past few years, observers report.
Its privatization program is stagnant, and initiatives toward reducing bureaucratic red tape and other economic distortions have languished in its congress. Its educational system leaves much to be desired, partly because its teachers unions have stood in the way of curriculum reform and teacher accountability.
Observers say that flexibility and modernization of its economy will determine the extent that Chile will be able to take advantage of its new position vis-à-vis trade with the U.S.
Source: Sebastian Edwards, "How Chile Can Make the Most of Its U.S. Trade Deal," Wall Street Journal, January 3, 2003.
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